This article was adapted from a study conducted by Professor Marilyn Helms at the University of Tennessee. Updated information was provided by the University of Tennessee. The article was provided for reprint by Chattanooga Neighborhood Enterprises, Inc.

t Chattanooga Neighborhood Enterprises (CNE), when a loan is made to a customer, the customer then hires a contractor who will use the money to pay his employees, to purchase materials from other businesses, and to build his company's capital. The contractor's employees then spend their salaries; the vendors and suppliers selling to the contractor spend their earnings; and the contractor's capital permits his expansion, resulting in the initial loan dollars being "re-spent" in subsequent purchases.

The 1.65 multiplier used in the CNE study applies to all spending - CNE loans, employee spending, and capital projects.

According to the "Statistical Abstract of the United States, 1992" households in the U.S. allocated 91 percent of personal income to personal outlays.*

*Personal outlays =

Personal Income - (Personal Savings + Contributions for Social Insurance )P ersonal Income

The study assumes that consumption behavior in households in the Chattanooga area mirrors the nation. Consequently, the study assumes that $9,100 of each $10,000 in household income is spent; of that $9,100 that becomes income to other individuals, $8,281 - or 91% of $9,100 - is spent, etc.

The pattern continues through subsequent purchases. The CNE employee payroll is subject to this allocation.

Because of re-spending, the multiplier exceeds one; however, many of the goods and services purchased in the area, although retailed in Chattanooga, are produced outside the area. Referred to here as "imports", only the portion of the price that remains with the local business and its personnel is available for re-spending. The "exported" income gets re-spent, but because it is spent outside the Chattanooga area, the importing reduces the multiplier's value. CNE's administrative expenses are first subjected to the 91% allocation as well.

The table on the next page outlines CNE's activity expenditures in the Chattanooga area, its actual spending - the expenditures reduced to equal 91 percent of total CNE payroll and administrative expenses, and then this spending amount is subjected to the multiplier.

The table provides an overview of the relationships among the expenditure sources. The total economic impact of CNE on the Chattanooga area economy equals CNE's total expenditures times the multiplier of 1.65, or $35,123,055.

The Employment Multiplier

The salaries paid to the 36 individuals at CNE represent the direct employment impact of CNE. In order to assess the total employment impact, the effect of CNE's expenditures on local employment must be considered. This is calculated by using an employment multiplier.

The employment multiplier relates organizational expenditures to jobs. Because of the focus of this impact study, local data is relied upon to calculate the employment multiplier.

Specifically, the employment multiplier is calculated by dividing Tennessee's gross state product of $107,323 million by Tennessee's employment for 1992 of 2,285,000 persons. These current figures were available from the January 1994 Economic Report to the Governor published by the Center for Business and Economic Research by the University of Tennessee at Knoxville. Thus, the average output per worker is $46,968.49.

If the indirect economic impact of CNE presented previously (or $35,123,055 minus initial spending of $21,286,700 equals $13,836,355) is divided by this state average output per worker, the result, 294, is an estimate of the number of additional Chattanooga jobs attributed to CNE expenditures.

Thus, CNE generates total local employment for 294 full time workers. This number includes the 36 full time CNE jobs plus the 258 indirect jobs (294 less 36) created through CNE's economic presence in the area. This job creation total excludes part time or temporary employment periodically used at CNE.

CNE's activities generate business and purchases. A portion of the employment created among a wide variety of organizations and institutions, from local banks to local building supply retailers, is illustrated on page 4.

Summary of the Annual Impact of CNE Payroll,
Purchases, and Projects on the Chattanooga Area
July 1, 1993 to June 30, 1994

Activity

Payroll

Administrative
Expenses & Services

CNE
Programs

TOTAL
IMPACT

Expenditure

$ 1,070,000

1,300,000

19,130,000

$21,500,000

Actual Spending

$ 973,700

1,183,000

19,130,000

$21,268,700

Total Local Impact
July 1, 1993 to June 30, 1994

$ 1,606,605

1,951,950

31,564,500

$35,123,055

Multiplier Effect FY1998 (projected)
Based on Updated Payroll and GNP Numbers Provided by the University of Tennessee, Chattanooga

Activity

Payroll

Administrative
Expenses & Services

CNE
Programs

TOTAL
IMPACT

Expenditure 98

$ 1,372,374

1,273,165

28,126,461

$30,772,000

Adjusted 98

$ 1,248,860

1,158,580

28,126,461

$30,533,901

Impact 1998

$ 2,060,620

1,911,657

46,408,660

$50,380,937

Real Estate Tax Growth and Preservation

In addition to the multiplied effects on spending and employment, CNE generates real estate taxes for the city as a result of their own home purchases and from the home purchase assistance they provide their customers. As shown in Table 2 on the next page, the annualized tax revenue due to the presence of CNE and their efforts is $1,286,190 made up of CNE and related entity purchases, home purchase customers, and homeowner rehabilitation (which preserves homes and, consequently, taxes).

The CNE amount of $39,000 in taxes was taken directly from CNE's accounts payable records for real estate taxes paid in fiscal year 1993. For the 746 purchase customers assisted thought March 31,1994, an average home sales value of $52,000 and an effective combined city and Hamilton county tax rate of $1.52 per one hundred thousand dollars of home value was used to compute the home purchase customer annual real estate taxes of $589,638.

For the 1,236 home rehabilitation customers, the $657,552 in annual real estate taxes generated was based on the effective tax rate applied to the average home value of $35,000

For comparison, Table 3 shows the annuity investment a city would need to earn that same $1.2 million in annual revenues - over $25 million at 5%.

While the rehabilitation customers were paying taxes before CNE's rehabilitation assistance, many of the emergency repairs saved these homes from immediate or future disrepair. The improvements increased the home values, preserved the housing units, and saved the city the expense involved in condemning and demolishing these properties, while simultaneously losing valuable tax dollars.

Customers Assisted

CNE products are designed to serve three customer categories: those at less than 50% of the median income, those from between 50 to 80% of median income, and those from 80 to 115% of median income. The Chattanooga area median income in 1994 was $33,500 as established by HUD.

African-American households represent the majority of households served and female headed households are also the most frequently served by CNE. Generally, the rehabilitation customers are older than the purchase customer and the majority of rehabilitation customers are at or below the 50% median income.

Table 2

Annual Real Estate Taxes Increased
and/or Preserved by CNE

Annual Real Estate Taxes Paid in 1993

$ 39,000

Home Purchase Customers
746 customers with an average home value
of $52,000 and an effective city and county
combined tax rate of $1.52 per hundred dollars
in home value

$ 589,638

Homeowner Rehabilitation Customers
1,236 customers with an average home value
of $35,000 and an effective city and county
combined tax rate of $1.52 per hundred dollars
in home value

$ 657,552

Annual Tax Revenue

$1,286,190

Table 3

Annuity Investment Required to
Generate Equal Revenue

Yield Required to Generate
$1,286,190

Annuity Investment
Amount

3.0%

$42,873,000

5.0%

$25,723,800

10.0%

$12,861,900

Summary

CNE provides jobs and training for its 36 employees, of which 11 represent African-Americans and 22 are women. Of the eight senior managers or Department Heads at CNE, three are African-American (38%) and three are women (38%).

CNE employees contribute to Chattanooga's credit base through their bank and other local investment activities. Com-bining the CNE 1993-94 payroll of $1,070,000 with the U.S. personal savings rate of 5.2% during the same period, the 36 CNE employees annually deposit approximately $55,640, into local financial institutions.

In addition to the quantitative benefits, CNE assists in community outreach activities, volunteer consulting activities, and supports national homeownership programs and agencies. CNE develops the human capital of their customers and has assisted in reversing the area's low income housing shortage.